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The “Labor Squeeze Stockouts”: The Enemy From Within
The New Yorker published an article this week claiming that the supply chain issues the world is experiencing are, in fact, labor issues.
This may sound very simplistic, given the complexity of supply chains and the volatility of the world around us, but there's truth to it. And as usual, things are not as simple as they seem.
People use the term ‘supply chain’ quite loosely, so before analyzing it, I want to create a visual. A supply chain is an interconnected network of entities that deliver a product from raw material to the end consumer. The steps include:
Manufacturing (whether in the US or offshore)
Logistics (land, air, or sea, if offshore)
Ports (If offshore)
Retail (including warehousing and stores)
Last-mile shipping (if delivered online)
During the last few weeks, we have seen significant issues in every stage of the supply chain caused by labor issues.
Manufacturers in the US are having a hard time recruiting workers given the suppressed wages. Logistics firms have suffered significant delays due to shortages in containers and significant slowdowns at the ports, driven by scarcity of both port workers and truck drivers. Finally, FedEx had to cut its growth projections this week due to their inability to recruit workers and drivers.
Who is Winning?
But notice that there is one group that doesn't suffer from labor shortages: the retailers. Indeed, Amazon and Walmart have been winning the labor wars.
This group continues to hire. Walmart just announced a plan to hire an additional 150K employees over the next few weeks. Amazon has plans to hire an additional 125K workers during the holiday season; this after having already increased the number of employees by 62% during 2020. While Amazon is also a logistics firm, it’s their role as a retailer, and the customers they serve, that dictates the rest of their decisions.
So, where is the disparity between the ability of the retailer to recruit people and the inability of the rest of the supply chain to hire people coming from?
You can’t fault the workers for choosing to work for the retailers in these supply chains. Working in manufacturing involves a low wage and very dim prospects for the future, given the automation trend and globalization (even if this is less of a trend these days).
Meanwhile, retailers like Amazon and Walmart continue to raise wages and benefits, as needed, to fill their positions. Amazon is quoting an average starting wage of $17 an hour for jobs at fulfillment centers, which also come with many benefits. The firm also recently announced that it would cover tuition to aid certain U.S. employees obtain a four-year college degree. Amazon and Walmart are also much more visible to workers since workers are more likely to shop at these firms, than at small manufacturers.
But let me take a slightly different angle on this labor squeeze within the supply chain. One can view the activity of firms in the retail sector as poaching. The retailers are effectively poaching current and prospective workers (those who sit on the sideline and choose where to work) from firms in other parts of the supply chain.
From a pure labor economics point of view, this poaching activity is not all that surprising. Based on studies of labor flows, people choose to work for the more productive sectors of the economy. Generally speaking, and to be fair, the economy is also better off if people choose to work for the more productive sectors of the economy.
Why are retailers the more productive part of the supply chain? As I discussed before, their proximity to customers (both physically and virtually) makes them the stage with the highest added value in the supply chain.
The part that the labor economics theory overlooks is that, in a supply chain, the sectors (links) are interconnected. Thus the productivity of one part of the supply chain is impacted by the productivity of another part of the supply chain. In our case, while Walmart may be a very productive firm, if the ports are congested, their shelves will remain empty.
A few years ago, I co-authored a research paper on poaching within supply chains, a case where one firm poaches employees from another firm in the same supply chain. In this study, we show that in an interconnected supply chain, it sometimes makes sense for the most productive firm to let its workers be poached by another firm downstream or upstream if this link creates a bottleneck. In fact, we show that the entire economy as well as the players in the supply chain are better off if they allow the less productive, yet more congested firm, to poach.
In the case of Walmart and Amazon, their short-term optimization is inflicting even bigger damages on the economy as a whole. In an interlinked supply chain, this is short-sighted. By hoarding workers, you exacerbate bottlenecks on the other end that are less productive to begin with.
Who should be Winning?
So, why are the retailers, who are already more productive, the ones poaching?
The competition in the retail sector is brutal. Amazon doesn’t mind if you, as a customer, experience shortages on Amazon as long as the shortages at Walmart are worse, or as long as the shortages at IKEA are worse.
Given the tough competition between Amazon, Walmart, and other retail firms, I am not sure we can fault the retailers for their actions of hoarding workers either. In fact, we will only see more of these behaviors, and we, as consumers, will only suffer more.
Furthermore, I would argue that while no one benefits from these shortages, the firms that suffer more are the smaller ones. Amazon can cover 4-year college tuition and offer higher wages. Given its ability to pool inventory and negotiate better terms, Amazon will win on both the worker side and the product side. The smaller retailer cannot do either.
Short-term failure of the economy plays to the long-term benefit of the bigger retailers.
What’s the solution?
Maybe the government? At this stage, governments have primarily shown the capacity to make things worse. They can offer training programs to get more skilled labor, but these programs take time. Furthermore, most of these programs are difficult to find and are often not worker-friendly. And when you do come across them, you are required to demonstrate that you qualify by jumping through all kinds of bureaucratic hoops.
So, In the short and mid-term, I do not see a viable solution. In the long term, prices are going to increase, employers are going to improve their benefits, more work will be automated, and we will reach a new equilibrium. In the meantime, we will experience more shortages and higher prices.
So what can you do until we reach the new equilibrium?
Buy your holiday gifts early, and buy them from the smallest possible retailer that manufactures at the smallest possible firm. Let small scale win this holiday season.